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Credit rating agencies in India: Their functioning and credibility

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‘Credit rating agencies’ function as a facilitator for the Retail and Institutional investor. They assess a company’s capability pay-off their financial obligations. The ratings of the companies and government entities help in making an informed decision by the investors. The agencies use unique method assigning ratings to the companies denoting their financial risk. Poor credit ratings indicate that the company is at a high risk of defaulting.



The term ‘credit rating’ denotes the credit worthiness of a company or firm in a numerical representation. The ‘credit rating’ is viewed by financial institutions, institutional investors and small investors before investing in the company. Most importantly the credit rating is used to determine the loan sanction and capital raising capacity of the company.

All credit rating agencies are regulated by SEBI (Credit Rating Agencies) Regulation 1999. Currently there are seven registered Credit Rating Agencies in India: CRISIL, CARE. ICRA, SMREA, Brickwork rating, India rating and research Pvt. Ltd. SEBI has made various rules for these credit rating agencies which pertain to their regulation. SEBI also directs the agencies to maintain the required disclosure standards.+



The DHFL Case – Diwan Housing Finance Limited offered debt securities and mutual fund on and failed to pay the interest on them and the value of the NAV dropped quickly. This was the first red flag raised about the company’s liquidity issue. It was then discovered that DHFL failed to pay 960 crore interest rates. DHFL then failed to pay 1150 crore on non-convertible debentures.

DHFL then started Wadhawan Global capital (DHFL’s Subsidiary) started selling stakes in order to meet the liquidity needs. Wadhawan Global Capital then started its selling spree by first selling its major holding in Affordable Finance Housing Limited (AFHL) and then sold their stakes in Avanse Financial Servies Ltd.

The panic among investors with regar1d to DHFL’s Poor financial condition struck when major stakeholders began selling their holding of DHFL in the secondary Market. DSP Mutual Funds in November 29, 2018 sold their stake which sparked the concern among the investors and DHFL when enquired about such rapid dumping of shares in the secondary market claimed that it faced no such liquidity issue and the credit rating for the company did not change even after such speculation. (DSP Mutual Fund’s Sale of DHFL Bonds: Here’s What You Need to Know, n.d.) It was then found that the Promotors of the companies have misused the company’s money to buy property abroad this fact was discovered on January 2019.



CARE was the first credit rating agency was the downgrade the company’s credit score from ‘A’ to ‘BBB’ where ‘A’ meant low credit risk and ‘BBB’ meant moderate credit risk. From May in the following month DHFL stopped allowing premature withdrawal. There was a delay in the payment of bond interest amounting to a whooping 960 crores. It was only in June that the credit rating agencies like CARE, ICRA, CRISIL and Brickworks rating portrayed the real picture of DHFL by rating it ‘D’ i.e. Defaulter in market.

But a huge delay was done even after that, trading was allowed in the shares of DHFL and it was only in June 9 ,2021 that the shares of DHFL touched the lower circuit and currently the company.

The IL&FS Crisis

The Capital Market got a heavy monitory blow from an NBFC recently, the IL &FS group. IL&FS group is a conglomerate engaged with major Infrastructure projects. This NBFC is majorly engaged in financing Infrastructure projects and have funded several notable projects like the Chennai- Nashri Road Tunnel India’s largest Road Tunnel. The company has raised huge amounts of funds from India’s debt market.

Company’s founder Mr. Ravi Parthasarathy steeped down from the company’s board in and then experts started noticing the defaults done by the company and its unsound financial condition. Then the RBI took upon itself to conduct an audit to check the company’s finances as the RBI is the regulator of Non-Banking Financial Companies in India. This power is bestowed upon the RBI by the RBI Act, 1934.



IL&FS had the LIC, SBI and some of other government organisations as its shareholders. The company lost the faith of the shareholders when it was noticed that it was not able to fulfil its debt obligations. The total debt of IL&FS along with its subsidiaries amounted to Rs. 94000 crores.

Currently, the company is going through Insolvency and merger proceedings. All trading of the company is suspended in the secondary market. 

 The credit rating agencies like Moody &Fitch took the notice of the issue very late. According to the experts the credit rating agencies failed to take note of the debt defaults and lack of liquidity options with the NBFC. In this case also the signs of defaults started in June 2018 but the rating agencies took the note of the biggest indicators of the NBFC’s downfall only in the month of August and September which was too late.

Some experts also suggested that there is a need to revisit the credit rating standards and a need to modify the overall rating system is the need of the hour.

In the recent rules and regulations framed by the SEBI for the credit rating agencies it has included that the agency has to disclose the liquidity position of the company to the investors, The rating history and pattern followed by the CRA is to be disclosed but most importantly the CRA has to analyse and inform the investors if the company’s liquidity position has detreated.

Over the past few years, the credibility of the credit rating agencies have been questioned as they have assigned the desired rating to the companies which have misled the investors and cause them heavy economic setbacks.

The Credit rating agencies play a very important role by putting a company status in alphabetical form informing its prospects to small investors but the cases happened and abroad with regard to the functioning of the CRA’s have raised concerns among the experts, the government and the regulators. This was even referred as a serious issue by the finance minister Nirmala Sitharaman in an event recently.

The Indian Stock Market since 2020 is at its peak glory the market has attracted the greatest number of retail investors in its entire history. The problem however, with these small investors is that they are in the market with limited capital and even lesser knowledge and at this point in order to make them stay longer in the market they need a little hand-holding from the side of the regulators. The regulators can help the retail investors greatly by checking the practice of credit ratings as the retail investors rely heavily on its judgement.

Credit rating agencies in India:their functioning and credibility

‘Credit rating agencies’ function as a facilitator for the Retail an Institutional investor. They assess a company’s capability pay-off their financial obligations. The ratings of the companies and government entities help in making an informed decision by the investors. The agencies use unique method assigning ratings to the companies denoting their financial risk. Poor credit ratings indicate that the company is at a high risk of defaulting.

The term ‘credit rating’ denotes the creditworthiness of a company or firm in a numerical representation. The ‘credit rating’ is viewed by financial institutions, institutional investors and small investors before investing in the company. Most importantly the credit rating is used to determine the loan sanction and capital raising capacity of the company.

All credit rating agencies are regulated by SEBI (Credit Rating Agencies) Regulation 1999.Currently there are seven registered CRA in India: CRISIL, CARE. ICRA, SMREA, Brickwork rating, India rating and research Pvt. Ltd. SEBI has made various rules for these credit rating agencies which pertain to their regulation. SEBI also directs the agencies to maintain the required disclosure standards.+

The DHFL Case – Diwan Housing Finance Limited offered debt securities and mutual fund on and failed to pay the interest on them and the value of the NAV dropped quickly. This was the first red flag raised about the company’s liquidity issue. It was then discovered that DHFL failed to pay 960 crore interest rates. DHFL then failed to pay 1150 crore on non-convertible debentures. DHFL then started Wadhawan Global capital (DHFL’s Subsidiary) started selling stakes in order to meet the liquidity needs.

Wadhawan Global Capital then started its selling spree by first selling its major holding in Affordable Finance Housing Limited (AFHL) and then sold their stakes in Avanse Financial Servies Ltd.

The panic among investors with regar1d to DHFL’s Poor financial condition struck when major stakeholders began selling their holding of DHFL in the secondary Market. DSP Mutual Funds in November 29, 2018 sold their stake which sparked the concern among the investors and DHFL when enquired about such rapid dumping of shares in the secondary market claimed that it faced no such liquidity issue and the credit rating for the company did not change even after such speculation. (DSP Mutual Fund’s Sale of DHFL Bonds: Here’s What You Need to Know, n.d.) It was then found that the Promotors of the companies have misused the company’s money to buy property abroad this fact was discovered on January 2019.

CARE was the first credit rating agency was the downgrade the company’s credit score from ‘A’ to ‘BBB’ where ‘A’ meant low credit risk and ‘BBB’ meant moderate credit risk. From May in the following month DHFL stopped allowing premature withdrawal. There was a delay in the payment of bond interest amounting to a whooping 960 crores. It was only in June that the credit rating agencies like CARE, ICRA, CRISIL and Brickworks rating portrayed the real picture of DHFL by rating it ‘D’ i.e. Defaulter in market.

But a huge delay was done even after that, trading was allowed in the shares of DHFL and it was only in June 9 ,2021 that the shares of DHFL touched the lower circuit and currently the company.

Currently, the company is going through Insolvency and merger proceedings. All trading of the company is suspended in the secondary market. 

The IL&FS Crisis

The Capital Market got a heavy monitory blow from an NBFC recently, the IL &FS group. IL&FS group is a conglomerate engaged with major Infrastructure projects. This NBFC is majorly engaged in financing Infrastructure projects and have funded several notable projects like the Chennai- Nashri Road Tunnel India’s largest Road Tunnel. The company has raised huge amounts of funds from India’s debt market.

Company’s founder Mr. Ravi Parthasarathy steeped down from the company’s board in and then experts started noticing the defaults done by the company and its unsound financial condition. Then the RBI took upon itself to conduct an audit to check the company’s finances as the RBI is the regulator of Non-Banking Financial Companies in India. This power is bestowed upon the RBI by the RBI Act, 1934.

IL&FS had the LIC, SBI and some of other government organisations as its shareholders. The company lost the faith of the shareholders when it was noticed that it was not able to fulfil its debt obligations. The total debt of IL&FS along with its subsidiaries amounted to Rs. 94000 crores.

 The credit rating agencies like Moody &Fitch took the notice of the issue very late. According to the experts the credit rating agencies failed to take note of the debt defaults and lack of liquidity options with the NBFC. In this case also the signs of defaults started in June 2018 but the rating agencies took the note of the biggest indicators of the NBFC’s downfall only in the month of August and September which was too late.

Some experts also suggested that there is a need to revisit the credit rating standards and a need to modify the overall rating system is the need of the hour.

In the recent rules and regulations framed by the SEBI for the credit rating agencies it has included that the agency has to disclose the liquidity position of the company to the investors, The rating history and pattern followed by the CRA is to be disclosed but most importantly the CRA has to analyse and inform the investors if the company’s liquidity position has detreated.

Over the past few years, the credibility of the credit rating agencies have been questioned as they have assigned the desired rating to the companies which have misled the investors and cause them heavy economic setbacks.

The Credit rating agencies play a very important role by putting a company status in alphabetical form informing its prospects to small investors but the cases happened and abroad with regard to the functioning of the CRA’s have raised concerns among the experts, the government and the regulators. This was even referred as a serious issue by the finance minister Nirmala Sitharaman in an event recently.

The Indian Stock Market since 2020 is at its peak glory the market has attracted the greatest number of retail investors in its entire history. The problem however, with these small investors is that they are in the market with limited capital and even lesser knowledge and at this point in order to make them stay longer in the market they need a little hand-holding from the side of the regulators. The regulators can help the retail investors greatly by checking the practice of credit ratings as the retail investors rely heavily on its judgement.

Avantika Banerjee

Avantika Banerjee is the Co-Founder of Indian Society for Legal Research and Assistant Professor at Law College Durgapur. She teaches taxation, banking, mergers acquisition and securities law.

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